Tax Liens: How Some Counties In Georgia Increase Investor Risk

If you’re new to tax-lien investing in Georgia, please take a minute to take a look at our pitfalls article. If you are moving forward with this type of investment, and are considering different Counties for your investment, make sure pay attention to how the different Counties operate.

Certain Counties in Georgia seem appealing to investors because they have more properties being auctioned off more often than many other Counties. However, some investors can be left holding the bag after having purchased an invalidly auctioned tax lien.

Our hypothetical example: A client purchased a tax lien based only on the value of several comparable properties, with no real title work having been done beforehand, which is not unusual with these types of auction purchases. The winning bid/purchase amount was high, less than 6-figures, but still tens of thousands of dollars. A year later, the investment firm approaches a firm to begin the process of foreclosing the right to redeem. When doing title work, sending out notices, and speaking with the interested parties, they discovered that the tax debtor was currently in bankruptcy proceedings. While this is not always automatically a deal-killer, it can definitely slow the process down, and increase its expense, but that’s a topic for a different article. By digging further into the current bankruptcy, thye discovered that the tax debtor had, in fact, filed a previous bankruptcy (which by now was dismissed) only a day or two before the tax-lien auction.

And just that quickly, the deal is dead, and the investor is left scrambling trying to minimize their loss.

The tax lien was auctioned off in violation of the original bankruptcy “stay,” and is therefore an invalid transfer. Period. But the prior bankruptcy was dismissed, so the investor should be fine, right? Wrong. The sale was invalid at the time it was made, and remains invalid.

So what happened?

Certain Counties (but not all) routinely transfer tax liens to one of several separate, private holding companies, who are the lien-holder at the time of an auction. These companies, and the Counties which utilize them, are huge bureaucracies, with too many hands not knowing what the other hands are doing. Having two types of bureaucracy “partner” in this way adds another layer of cracks for things to fall through. Though notice of the original bankruptcy appears to have been properly (at the last minute) given to the County and whichever 3rd-party company was involved, the auction was not halted, and the investor bought a worthless piece of paper, but didn’t find out about it until a year later.

Even though the statute authorizing the transfer of the tax liens (or “Fifas) has been repealed, there are still “Partnering” Counties which persist in making these transfers to outside companies.

When purchasing a tax lien at auction, you are taking on the risk that the selling/auctioning party has complied with all notice requirements as well as other legal requirements in making the sale at the auction. If not, the paper you purchase may be completely invalid.

What are the hypothetical investor’s next steps? First, keep in mind that a large portion of the auction purchase-price went to pay the tax arrearage on the property. There are also excess funds over and above the purchase price are being held by auctioning County or the holding company. The investor can seek the return of those funds, but that may involve a lawsuit, as he is not an interest holder with any right of redemption, and also not a secured party, and not yet the full record owner of the property, either. Even if this claim against the excess funds is successful, though, this doesn’t make the investor whole, as the amount applied to taxes would not be included in any release of the excess funds. A further lawsuit against the County (or one of the holding companies) may be required, based on wrongful foreclosure or sale of the tax lien. Even though the theory of that case would be very simple (Investor claims that ___________ conducted an improper sale, causing him $_____________ in damages), doing battle with different faceless holding companies and a governmental agency as your defendants is an expensive and time-consuming prospect, even if you eventually prevail.

While taxing authorities (specifically Cities and Counties) must comply with the notice and legal requirements in order to conduct a non-judicial tax sale, Some Counties add a special layer of bureaucratic complication by utilizing these 3rd-party companies, which weakens accountability just that much further. As always, the fact that someone (or some entity) is clearly responsible is different altogether from holding them accountable.

So, as with all investments, buyer beware, but especially if you’re bidding in one of these “Partnering” Counties.